Accounting Policy – Meaning of Accounting Policy with different types
Accounting Policy – Accounting Policies refer to specific accounting principles and methods of applying these principles adopted by the enterprise in the preparation and presentation of financial statements. Policies are based on various accounting concepts, principles and conventions. Accounting policies are the specific principles and procedures implemented by a company’s management team and are used to prepare its financial statements. These include any methods, measurement systems and procedures for presenting disclosures.
There is no single list of accounting policies, which are applicable to all enterprises in all circumstances. Enterprises operate in diverse and complex environmental situations and so they have to adopt various policies. The choice of specific accounting policy appropriate to the specific circumstances in which the enterprise is operating, calls for considerate judgement by the management
The areas wherein different accounting policies are frequently encountered can be given as follows:
- Methods of depreciation, depletion and amortization;
- Valuation of inventories;
- Treatment of goodwill;
- Valuation of investments;
- Valuation of fixed assets.
This list should not be taken as exhaustive but is only illustrative. As the course will progress, students will see the intricacies of the various accounting policies.
Suppose an enterprise holds some investments in the form of shares of a company at the end of an accounting period. For valuation of shares, the enterprise may adopt FIFO, average method etc. The method selected by that enterprise for valuation is called an accounting policy. Different enterprises may adopt different accounting policies. Likewise, different methods of providing depreciation on fixed assets, i.e. Straight line, written down, etc. are available to the business enterprises which will lead to different depreciation amounts.
The accounting standards issued by professional accounting bodies limit and reduce alternatives out of which accounting policies are to be selected by an enterprise for measurement and reporting of business transactions. Thus, the specific accounting policies are selected by an enterprise in conformity with generally accepted accounting principles and the accounting standards. For example, as per matching concept, depreciation should be treated as cost of doing business and matched with revenue of the same period. As per Accounting Standard-6 depreciation can be calculated by straight line method, written down value method etc. So, the organization has to make a policy as to which method it wants to follow. Similarly, valuation of inventory, treatment of goodwill, valuation of investments, valuation of fixed assets etc. are the significant areas which require standardization of accounting policies to ensure relevance and reliability of accounting information.